Many business owners who are Baby Boomers or older Gen X’s are thinking “What’s next in my life? What’s the next chapter of my life going to look like? Ideally, for them it will be a chapter lived happily ever after following the successful transition from their business.
There are many definitions for success, but a successful transition in my view is when a person goes on to live a purposeful and fulfilling life where they can do what they like, when they like, without any remorse, restrictions or regrets … as they say, living life happily ever after.
“Happily ever after” is a concept that has been instilled in us since we were children. Ever since we could walk, talk, and read, every fairy tale inundated us with the idea of a happy life. The stories we read involved marrying the person you love, raising your own children, and living a life focused on family. This childhood dream and fantasy continue to live with us as we grow older.
Work never played a part in any of these characters’ happy endings. Work is often seen as a means to an end – the happy ending we are all after. When starting a business, many owners fantasize about finally selling the business for a huge sum of money, which they will use to purchase a retirement home in the countryside or near a serene lake.
But how many of us actually do?
THE REALITY
While many of us have these dreams of extracting the highest value from our businesses and eventually living what we deem to be a happy life, most of the time, they remain lofty aspirations that never see the light of day.
In 2018, UBS’ Investor Watch Report found that 52% of the business owners surveyed intended for their businesses to be sold to a 3rd party in the future.
Despite that, 48% of business owners who want to sell have no formal exit strategy for their business, notwithstanding the business represents, on average, 80% to 90% of a business owners wealth! No plan for liquidating your largest wealth asset is not a good strategy.
And the market is becoming a “Buyer’s Market”.
As of 2017, there were more than 60,000 businesses listed for sale, which marks an 800% increase in the number of businesses in the market from 2007 to 2017. Now, with the increasing number of Baby Boomers reaching the retirement age of 65 and looking to sell their businesses, this number has increased.
What’s a more alarming statistic is only one in five (20%) of small and mid-sized businesses placed on the market actually sell (Snider, 2016). On the flip side, this means 80% of owners of small and mid-sized businesses CAN’T SELL THEIR BUSINESS!
Even if they do sell, they are undervalued, which means that they are sold at a price that is much lower than their actual value (BizBuySell, 2018).
And to ramp up the alarm even further is the statistic that 3 out of 4 of the business owners who sold their businesses (i.e., those within the 20% of businesses that sold), when interviewed 12 months after their sale, stated that they profoundly regretted their decision to sell (Exit Planning Institute, 2016).
These are not great statistics if you’re planning to sell your business in the future.
That means that only 5% of business owners who put their businesses on the market to sell are happy with the result! They are the only ones that have succeeded in maximising the value of their largest asset and transitioned into the next chapter of life with freedom & fulfillment.
These findings point to a stark realization that, for the majority of business owners, being able to extract maximum value for their largest wealth asset (their business) and transition out with success may not actually be rooted in reality.
WHY DO 95% OF BUSINESS OWNERS FAIL?
Let’s look at these alarming statistics in more detail …
Statistic No. 1 – 80% of businesses don’t sell
Why don’t they sell? Well, there are four (4) main reasons businesses don’t sell. These are: –
1. Unattractive business
Being unattractive has two major hurdles. Within the 80% of businesses that don’t sell, the first hurdle is convincing business brokers or M&A advisors to take the business on as a listing in a buyer’s market. Being unattractive in a beauty parade is not a good start to winning the contest. Brokers and M&A advisors don’t want to waste time promoting a dead duck. This is why 70% of businesses don’t even get the chance to be put on the market.
Unattractiveness is predominantly due to the poor condition of the value drivers within the business. Before taking any business to market, the owner should enhance the value and make it attractive by improving these value drivers (see my article on FROGS that drive up business value).
The next three reasons attribute to the remaining 10% of why businesses don’t sell.
2. The Owner & Market disagree on business value
This is where the other major hurdle for an unattractive business comes into play. The acquirer sees an ugly baby and values it accordingly, whereas the owner sees a beautiful baby and is shocked that others don’t see the same.
The result is for the value of bids from acquirers to be way off the owner’s expectations. As the saying goes, “the value is really what the market is willing to pay”.
If an owner has not undertaken adequate due diligence on their business (including its expected valuation) before putting the business on the market, then the offers from prospects can be a huge disappointment.
3. Skeletons in the business closet
Notwithstanding the Information Memorandum and initial review make the business look attractive to a bidder (which leads to their offer to buy the business), once they commence detailed due diligence, issues can arise that change this perception. The issues often relate to one or more of the value drivers briefly referred to in Item 1 above (“Unattractive Business”). Examples of these issues include inaccurate calculation of financial results, potential legal liabilities, customer concentration levels, or concerns relating to key employees staying with the business after the sale. Whatever the reason, the bidder generally will try to retrade the offer, or totally withdraw from the sale process altogether.
To minimize this risk, the owner should prepare a robust data room for the due diligence phase and know all the risks to the business value. These risk issues should be divulged to their M&A team before going to market so the M&A team can prepare and manage these risks well before it becomes a loss of confidence issue with bidders.
4. The Owner gets cold feet
If the owner has just focused on the sale of the business and had not considered what’s next in their life, then when the time comes to sign the business sale papers and close the deal, it’s common for an owner to think, “what am I going to do next week?” This can cause panic and anxiety, and they get “cold feet”. This leads to the owner pulling the business off the market. Not a good result for any of the parties.
Prior “life planning” before the business is placed on the market will prepare the owner for “what’s next” and should overcome this issue.
Statistic No. 2 – 75% of the remaining owners regret doing the sale
So now the remaining 20% of businesses have sold, however, surveys show that 75% of the remaining owners profoundly regret selling their business 12 months after the sale. Why? Well, there are two (2) main reasons for their unhappiness. These are: –
1. Insufficient money for the Owner’s desired lifestyle
If the owner agrees and completes the sale based on the headline (gross) price only, then they can be shocked when cost factors reduce the post-sale proceeds, or find the net amount doesn’t cover their desired investment parameters.
One of the major cost factors overlooked is taxation, which can change depending on the terms and structure of the agreement. For example, a Share Sale (buying the company’s shares) or an Asset Sale (buying the business’s assets only) can have different taxation implications for both the buyer and seller.
Another major financial factor is the value of any earn-out associated with the business sale. For example, if an owner has 40% of the sale price tied up in an earn-out agreement (where the value is only paid out when the business reaches certain KPIs following the sale), then 40% of the wealth created from their business sale is based on KPIs that the owner does not control. This is risky, and the owner may not see the full sale proceeds as anticipated. To reduce owner dependency, having a management team and systemised operations in place before the business is taken to market can reduce the need for an earn-out clause in a sale agreement.
Other financial factors that can affect the net amount the owner needs to live out their desired lifestyle include: –
• What amount needs to be invested to achieve their desired financial returns … and what risk/reward strategy are they implementing in this case?
• The cost of the sale process – legal fees, sale commissions etc
2. The Owner is bored
Before the sale, the owner probably led a life where they were the boss and mentor, had authority and could command attention, controlled the purse strings, and generally kept themselves busy operating an entity that delivered purpose and fulfilment in their life. The business was their identity; it was their life.
Now with many of those drivers gone, they risk their life becoming lonely, boring, meaningless, and unfulfilling. Without prior planning, the boredom experienced and the loss of identity can send the owner into depression.
Again, prior planning is the key. Here are some aspects a business owner should consider when dreaming of their ideal future: –
• Their health and fitness
• Their values and priorities
• Their motivations in life – what gets them going?
• The kind of lifestyle they would like to lead
• Their goals and aspirations for the future
• Their interests outside work
• Their bucket lists
• Their future career path – do they want to continue working part-time or retire completely?
• The type of transition and exit they desire to have for their business
• Their plans for after the sale of the business – what will they do? Where will they stay? And with whom?
• The legacy they want to leave behind
• Their family positions
• Their estate planning
Statistic No. 3 – Only 5% of owners live happily ever after
If the business owner has addressed the issues impeding a successful transition, they become the minority, i.e. the remaining 5% of owners that enter the next chapter of life happy and free.
They’ve reduced the load from their work life or stopped working altogether. They’ve fulfilled their responsibilities to their loved ones and society and are free – free to decide what they want to achieve outside of societal pressure and expectation, free to do anything they want, free to embark on pursuits of wisdom, legacy, and self-actualization. They are living life happily ever after.
HOW TO BEAT THE ODDS
If you don’t want to end up like in dire straits like the majority of “soon to transition” business owners in the market, you need to act now, because it doesn’t just happen overnight … it takes time, anywhere from 3 to 5 years on average!
Here are some recommendations you should consider:-
- Make your business attractive for sale or transfer (from the outside)
- Make your business ready for sale or transfer (from the inside)
- Grow and align the business value to meet your financial goals
- Prepare and plan for your new life that will make you and your loved ones happy – these are your personal goals
The process to discover, plan and action the above recommendations is known as business transition planning (or exit planning as it is sometimes called).
The term “business transition planning” can be misleading. Contrary to popular belief, business transition planning is not a plan for your death, nor an effort to kick the business owner out of their business.
Instead, business transition planning is the creation and execution of strategies that align all the personal, financial, and business goals of the business owner.
So if you are a business owner that prioritizes personal well-being and business wealth in your life, then business transition planning should be seen as one of the most important strategies you will ever undertake because: –
- 1. Selling your business is not as easy to do as you think, especially in today’s highly competitive Baby Boomer market; and
- 2. There are serious consequences to your business, yourself, your family, and everyone around you if you do not devise an transition strategy ahead of time; and
- 3. You want to make sure that when you choose to transition or sell your business, you really can do so; and
- 4. When your business is transitioned or sold, you don’t want to feel regret for the rest of your life.
By adopting this business transition process, you can find newfound freedom and peace of mind – confident that you can transition or exit from your business in the timeframe you want, for the money you need and on the terms you desire.
The objective … to transition into your next phase of life and live happily ever after!
The result = SUCCESS!
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact a lawyer or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
